Earlier this month, Chinese law enforcement officials arrested the manager of prominent hedge fund Zexi Investment, as well as executives of trading company Yishidun, for alleged futures trading schemes. First reported by state news service Xinhua, these arrests are part of the Chinese government’s escalating efforts to rein in abuses in the nation’s securities industry in order to bolster investor confidence in the nation’s market.
According to Xinhua, Zexi general manager Xu Xiang allegedly acquired nonpublic stock information in violation of Chinese law and then used that information to commit insider trading and to manipulate stock prices. Xu is well-known in China — Zexi is one of the most successful Chinese hedge funds, managing more than 20 billion yuan — making this one of the most newsworthy arrests yet in China’s efforts to restore calm to trading. Law enforcement officials have also detained a number of Zexi employees, and the Shanghai Stock Exchange has imposed a two-year trading suspension on four companies’ shares held by investors tied to Xu.
Separately, Yishidun executives Gao Yan and Liang Ze were arrested for allegedly using software that enabled them to trade large volumes of futures at prices far different from the going market price. China’s Ministry of Public Security determined that in June and July, when Chinese markets were experiencing significant volatility, Yishidun’s software allowed it to purchase up to 31 futures contracts per second. An associate at a futures company, Jin Wenxian, was also arrested for allegedly helping Gao and Liang conceal their manipulative trading. The investigation is ongoing, and Chinese officials may arrest more co-conspirators connected to the alleged scheme.
Chinese authorities continue to take steps to ease the market uncertainty that has persisted since June. Officials are investigating automated trading like the software used by Yishidun, and laws have been proposed that would bolster the government’s regulation of such trading. Illegal margin financing and malicious short selling are also targets of governmental inquiry. Since August, the China Securities Regulatory Commission has been pressuring hedge funds to curb such activities, and has also opened investigations into additional trading technology companies. The CSRC also announced more than 2 billion yuan ($314.8 million) worth of fines in 12 instances of stock market manipulation.